The market was reportedly worried on Monday about the increasing trade tension with China. Well, absolutely nothing improved on that front overnight, and yet the S&P futures are up four points this morning and are trading 0.2% above fair value. Meanwhile, the Nasdaq 100 futures are up one point and the Dow Jones Industrial Average futures are up 46 points.
What does this tell us? A simple deduction is that the market wasn't as hung up on trade matters Monday like reports suggested. The simplest deduction, though, is that there are more buyers than sellers.
Why are there more buyers than sellers today versus yesterday? Find a headline to make the explanation work and there you have it.
For example, interest rates have gone up across the yield curve today, so the stock market must be interpreting that as a good indication of confidence in the economic outlook, which is good for earnings.
Of course, if the futures were down, that explanation would probably be spun this way: interest rates are up across the yield curve, which is creating concerns about multiple compression and/or a potential slowdown in economic growth.
Let's agree, then, not to over-analyze matters and accept the futures indication for what it is: an opening indication driven by a smaller subset of market participants versus the collective masses that confer each day to trade the cash market.
If the current disposition of the futures market holds, the major indices will start the session on a modestly higher note.
There is no good headline explanation to account for things.
In fact, there is a smattering of headlines that one might be inclined to think would have the futures under some pressure:
- President Trump is speaking today at the UN and will reportedly be very critical of Iran
- Facebook (FB) is down 2.3% following the news that the co-founders of Instagram are resigning
- BMW Group (BMWYY) cut its FY18 auto revenue segment guidance and lowered its group profit guidance, citing continuing international trade conflicts
Getting back to interest rates. Why are they up across the curve today?
There isn't a specific news driver there either, yet it is thought more investors are waking up to the possibility that the Federal Reserve will see its way next year to raising the fed funds rate above neutral.
The Federal Reserve begins its two-day FOMC meeting today, which is sure to conclude with the announcement of a hike in the target range for the fed funds rate to 2.00% to 2.25%.
Strikingly, it is the 2-yr note, which is more sensitive to changes in the fed funds rate, that is the weakest-performing instrument this morning. Its yield has jumped four basis points to 2.84% while the yield on the 10-yr note has increased three basis points to 3.10%.
That translates to a slight narrowing of the 10-2 spread to 26 basis points, which might not sit well with the financial stocks. We'll see how they are traded today, yet it has not been unusual for the financial sector's trading fate to be tied to the shape of the yield curve (i.e. down with a curve-flattening trade and up with a curve-steepening trade).
The broader market for its part is indicated higher at the start because... well, let's just say because.